MortgagesThe Advantages of PreapprovalBy VICKIE ELMER WITH the housing market warming up in many areas, and multiple offers becoming more commonplace, buyers who want an advantage
35 Mortgage Terms You Should Know
Dated: September 26 2019
Thanks to Bill Gassett, real estate agent out of the Metrowest Massachusetts area, for compiling and sharing this information ...
Whether you are buying or selling a home, there are specific “mortgage terms” that are essential to understand. The mortgage process can be intimidating, and no wonder, since you are trying to qualify for what is likely the most substantial loan you have ever requested.
Fortunately, with sufficient research and a helpful lender, you can do like so many others have done before you and successfully navigate the path to becoming a homeowner.
Below you will find a list of thirty-five common mortgage terms that will be useful as you move forward with your loan application. You will see most if not all of them before you are done! When you are buying a home, it is paramount to understand the lending process.
It would behoove any buyer to ask a lender questions before making any kind of financial commitment. Buyers and sellers should always have a firm grasp of real estate terms along with pertinent mortgage lingo as well.
This is the term that describes how your loan is paid off over time, with the interest and principal being paid off at different rates at different times – while your monthly payment remains consistent.
You will typically pay more towards interest and less towards your principle in the first few years of your mortgage, although your monthly payment will remain consistent. The length of your mortgage will determine how much interest you pay over the life of the loan.
Depending on your circumstances, you may want your loan term to be longer or shorter.
The appraisal is what tells the lender what a home is worth. It must be performed by a licensed appraiser. The appraisal price needs to be similar to the amount you offer on the house to qualify for a mortgage. Lenders hire independent appraisers to verify that a property is worth the price a buyer is paying for it.
Appraisers are human beings, just like the rest of us. At times they may make a mistake and value a property incorrectly. Buyers may be in a position where they need to challenge a low real estate appraisal. Disputing an appraisal is not easy but can be done when you have a top-shelf real estate agent in your corner.
Annual Percentage Rate (APR)
The APR tells you what a loan is going to cost, including the interest rate for the loan and the cost of securing the loan. APR can be a decent way to compare loan costs between one lending program and another.
Clear to Close
After your loan application and documentation have been reviewed and approved by the underwriter, they will state that your loan is clear to close so that you can get your funding. Hearing “clear to close will be music to both a buyer’s and seller’s ears, especially when a real estate transaction has any kind of hiccups.
Closing costs are the costs you incur while buying the home beyond your down payment, like mortgage fees, appraisal, and so on. You are expected to cover closing costs as well as the down payment, so you need to budget accordingly.
At times in real estate transactions, buyers will ask a seller to cover some of the closing costs. In real estate circles, this is known as seller’s concession or closing cost credits.
Quite often, when buyers are purchasing a new home, they will need to get a construction loan if they are not buying directly from a builder. An example of this is when you buy a plot of land to custom build your own property. Construction loans work differently than traditional mortgages, and you should be familiar with the nuances.
Debt to Income Ratio
Your debt to income ratio is your gross income divided into your monthly consumer debt – used by lenders to determine how much home you can buy. Having too much consumer debt relative to your income will make it more challenging to get an excellent loan.
Lenders use debt to income ratio (DTI) as a basis for determining the likelihood you will pay back the loan.
How much of your home you own versus how much the lender holds. The more you pay down your loan, the more equity you have. For example, if your house is worth $400,000 and your loan balance is $200,000, you would have 50% equity in the property.
Most lenders require you to fund an escrow account for your property taxes and home insurance. The lender will use that account to pay these fees. Another form of “escrow” is the money that a real estate agent or attorney holds in an account as security you will perform under the terms of the purchase contract.
In many states, a five percent down payment is common to be put into an escrow account. These monies are accounted for at the time of closing.
Another mortgage term to be familiar with is an escrow holdback. An escrow holdback occurs when some obligation in a real estate contract has not been performed. The holdback ensures that the responsibility will be fulfilled.
For example, if a septic system fails, there may be a holdback to ensure that a new system is completed by the homeowner. Quite often, banks make sellers holdback 1.5 times the estimate of replacement.
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac are government-sponsored agencies that provide affordable mortgages to low-middle income borrowers. These organizations are involved in over 90 percent of the mortgages in the U.S.
A mortgage-backed by the Federal Housing Association (FHA) – typically offers reasonable rates to borrowers who qualify, like those seeking to buy their first home. One of the advantages of an FHA loan is the ability to put 3.5% down. Having a lower down payment is attractive to many first-time buyers who do not have a significant amount of money saved.
The credit score lenders use to determine what kind of mortgage you qualify for. Your credit score has a significant impact on your interest rate. It makes a ton of sense for buyers to work on increasing their credit score before purchasing a home. Your credit score can have a significant impact on the loan terms you receive as a borrower.
A mortgage that has a fixed rate for the life of the loan, meaning your interest rate and principal will never change until you pay off the loan. A fixed-rate loan is one of the most popular loan products. Most fixed-rate mortgages are written as either ten, fifteen, twenty, or thirty-year loan terms.
In recent years, however, far more lenders are writing customized loan terms where borrowers can pick more unusual mortgage lengths. Often paying off a mortgage surrounding a specific date such as retirement are becoming more common.
A Jumbo Loan is a mortgage that is too big to be purchased securitized or backed by FannieMae or FreddieMac – in most places the jumbo loan is considered above a mortgage of $484,350. In some areas of the country like Washington DC and California, where real estate is costly, the loan limit is $726,525.
Once you start seeking a jumbo loan, you enter different territory than you would be seeking a more standard loan amount. You may have to find specialized lenders and should definitely consult with a Realtor that is familiar with luxury homes.
A loan estimate is a three-page document that covers the details of your loan, including the closing costs, interest rate, and loan amount. Loan estimates are given to borrowers, so they have a strong understanding of exactly what their loan is going to cost. It allows you to compare costs from various lenders.
The cost of what you will pay with one lender vs. another should be a strong consideration for choosing a lender. Take a look at all of the tips for picking the right financial institution for your mortgage needs.
A loan estimate is one of the more essential mortgage terms to understand.
Make people don’t have an understanding of what a loan originator does. They are the customer service part of the lender’s operation, which is the individual who facilitates your loan application and takes you through closing.
There are different types of loan programs that you can participate in based on your needs and qualifications, such as standard mortgages, low money down loan programs, and other types of loans. Most home buyers will benefit from researching all the various loan programs out there. You may find that you qualify for a program that can save you a lot of money or make it easier to get the home of your dreams.
For example, there are many types of first-time buyer loans worth exploring.
Loan to Value Ratio
How much money you have put into a home purchase versus how much you are getting from the lender. So for easy math is you are putting down ten percent of your own money, you would have a 90-10 loan to value ratio.
Mortgage Payoff Statement
A mortgage payoff statement is a document from your lender that will calculate your remaining mortgage balance, including any fees. Essentially it tells you how much you need to pay off on your mortgage.
A mortgage payoff will be needed when you are selling your house. The document will include the remaining principal owed on the loan and any interest accrued up through the date of payoff. Lenders order this document before closing.
signifying one percent of the loan amount. For example, if you have a $300,000 loan, one point would be $3000. It is essential for borrowers to understand when they should pay points or not.
Generally, it is better to pay points when you know you’ll be in a home for a more extended period. When you pay points, your interest rate comes down. When you don’t pay points, the interest rate will be higher. So what you need to do is calculate the difference in payment to see what the payback period would be.
Pre-paids are fees that you pay ahead of time regularly to ensure you can pay necessary bills on time, like your home insurance and property taxes. You pay money into an escrow account leading up to when these bills are due, so you are guaranteed to have sufficient funds to cover the fees.
Pre-qualified vs. Pre-Approved
One of the more important things for home buyers need to understand is that pre-qualified and pre-approved could be two different mortgage terms depending on the lender. In many financial institutions pre-approved for a mortgage and pre-qualified don’t mean the same thing.
Generally speaking, you want to be pre-approved. With a pre-approval, the lender is verifying your income, employment, and credit score. In some lending circles, a pre-qualification just means that you are qualified to borrow a certain amount of money based on what you tell the lender. There is no verification.
To make things more confusing, a percentage of lenders interchange these two mortgage terms as being the same. A significant first-time buyer mistake is not getting financially vetted before looking at homes.
The amount of your monthly mortgage payment that goes towards the principal of your loan. Many borrowers choose to put extra money when available to be put towards paying down the principal. Over the life of the loan, paying additional funds can dramatically reduce the interest you pay over the life of the loan.
Private Mortgage Insurance
Private mortgage insurance is a mortgage term you need to understand. You will usually have to pay for private mortgage insurance when you put down less than 20% for your home. Once you reach 20% equity in your home, you’ll want to cancel your PMI.
Private mortgage insurance is a fee that benefits your lender and nobody else. While it got you into the home initially, there is no benefit beyond that for a homeowner. You will want to terminate this useless fee as soon as you’re able.
Some borrowers will look to avoid paying private mortgage insurance altogether by going with an unconventional loan program.
The mortgage processor is the individual that handles all the details of your paperwork to get the loan. They double-check the details and make sure that everything is in order before going to the underwriter.
Interest rates fluctuate daily. To ensure that you get a specific interest rate over the long term, you need to get a rate lock from your lender. When interest rates look like they could be heading higher, it becomes more critical for a borrower to lock their interest rate. If it seems like interest rates are trending downward, some borrowers may want to wait before locking.
Bank Rate has an excellent resource on what you need to know about rate locks.
A reverse mortgage is a type of mortgage where you access the equity you have in your home to get cash now. Typically an option is chosen by older homeowners with significant equity in their homes. The minimum age to get a reverse mortgage is sixty-two.
Borrowers need to make sure they choose a reputable lender when getting a reverse mortgage. Many loan sharks are working in the reverse mortgage end of the business.
Of all the most common mortgage terms, title insurance may be the most vital one to thoroughly understand. Title insurance is an insurance policy that you need to purchase so that your title company will cover losses that result from a defect in the title.
There are two types of title insurance. A lender’s policy and an owner’s policy. Lenders always have title insurance. An owner’s policy is optional. As a thirty-three veteran to the real estate industry, I can tell you that is unquestionably worth the one-time fee.
If you were involved in a title insurance claim without coverage, you could potentially lose tens of thousands if not much more.
Truth in Lending
Truth in Lending is a federal mandate that all lending institutions are required by law to follow. There are several essential aspects to the Truth In Lending regulations, including proper disclosure of interest rates, how to advertise mortgage loans as well as other aspects of the lending process. These banking regulations were put into effect to protect consumers from potential fraud.
A VA mortgage is a loan partially backed by the Veteran’s Administration for veterans, service members and certain spouses of service members. If you qualify, you can get a mortgage that requires zero down and comes at a reasonable interest rate.
There are, of course, certain qualifications you must meet to get a VA loan, including serving or having served in the military. Take a look at all of the benefits to a VA loan.
Also known as adjustable-rate mortgages, variable-rate mortgages offer a fixed interest rate for a specific period of time, then the rate adjusts at a set point in time. For example, you could get a loan that is amortized over thirty-years but is fixed only for the first five years. At year five, the interest rate could adjust up or down depending on where interest rates are at that point in time.
Adjustable-rate mortgages tend to benefit those borrowers who don’t plan on staying in a home for a significant amount of time.
What are underwriting and an underwriter? The underwriter is the one who will decide if you get the loan or not by checking your credit, assets, and income. Underwriters are an essential part of the function of most major lenders.
Mortgages that are backed by the United States Department of Agriculture are known as USDA loans. These loans are typically available to buyers in less industrialized areas in order to encourage homeownership in rural areas. If you qualify, you can pay as little as zero for your down payment.
Short sales become more prevalent in tough economic times, whereby borrowers are not able to keep up with their mortgage payments.
A short sale is one where the sale price of the property is less than the amount of loans owed on the property. For a short sale to go through, all lien holders need to agree to take less than the amount they are owed for the debt.
Short sales become more prevalent in tough economic times, whereby borrowers are not able to keep up with their mortgage payments. Short sales were commonplace in the economic downturn from 2007-2012.
Questions? Ask Your Realtor or Lender
No one expects you to know the mortgage process inside and out – much less the definition of every single term you come across. If you have questions about any term, you find while researching mortgages or during the application process, just ask your agent or your lender. Both are there to help you navigate the lending process efficiently and successfully.